Develop “Analog” Wisdom, not “Digital” Knowledge

Takateru Kawano is the president and chief executive officer of TKP Corporation. TKP made great strides in its business leveraging the power of IT to rent out a network of unused banquet rooms at hotels and other facilities for conferences and has become the largest APA Hotel franchisee. Toshio Motoya spoke with Kawano, the Japanese 2017 EY Entrepreneur of the Year Award winner who attended the 2018 forum in Monaco, about the difficulties of doing business.

Land should be bought and owned when interest rates are low

(M) Thank you for joining me on Big Talk today. You are the president and CEO of TKP Corporation, which offers roughly 2,000 rental conference rooms across Japan. TKP is also the largest franchisee of APA Hotel, with 10 hotels totaling 2,002 rooms (including those that will be opened in the future). I assumed I had already interviewed you, so I quickly extended an invitation when I realized you hadn’t appeared on Big Talk yet.
(K) I look forward to talking with you today.
(M) We became acquainted eight years ago, when you met with the president of APA Hotels about a full-page ad to be run in the Nihon Keizai Shimbun newspaper in October 2010.
(K) Yes, I was greatly inspired by her. TKP’s management style was to not own our own real estate, but she influenced me to possess real estate with the aim of gaining a sustainable, competitive edge. TKP started working with APA Hotel when we concluded a contract to rent out rooms on the first basement floor of APA Hotel & Resort Tokyo Bay Makuhari. We operate these as conference rooms, and split the profits evenly with APA Hotel. Getting an up-close look at APA Hotel, I was impressed that your main profit source is lodging, not banquets or dining. I heard you started the hotel business as a tax-saving measure, but I’ve seen with my own eyes how much it has grown.
(M) Since the time of our first meeting in April 2010, APA Group has been doing business according to our Summit 5 project. Our goal is to gain the top position for number of guest rooms by buying hotel sites in three wards of central Tokyo (Chuo, Minato, and Chiyoda), and also to be number-one in the condominium field. We have bought a great deal of land based on our policy of owning real estate when interest rates are low – after all, the interest is lower than paying land rent. Buildings are also subject to amortization, which rapidly grows our latent assets.
(K) I was astounded that your initial target was central Tokyo. I heard it was extremely difficult to raise funds from banks at that time, and especially so for hotel construction.
(M) That was after the 2008 financial crisis, when people were saying that rising developers would be annihilated by their inability to get funding for new projects, and by demands to pay back the money they had been loaned. I suppose we can say that APA Group was fortunate. In 2007, an issue arose about insufficient earthquake resistance at an APA Hotel in Kyoto. The media portrayed APA as the perpetrator, but our role was merely to have the building confirmed based on the design and seismic analysis created by the architecture firm we hired, and then to order a general contractor to construct the building. The financial institutions were anxious, and they demanded that we repay our outstanding loans. That was the peak of the fund bubble, and the hotel sites we purchased cheaply had reached rather high prices. We sold all of the land where we planned to build hotels and paid off our loans, totaling 38 billion yen.
(K) So the banks really did demand repayment.
(M) However, that was over a year before the financial crisis, so we were able to sell off our land at high prices. We even paid back the working capital for condominium construction in advance, so we made a lot of cash money in condominium sales. After that, the financial crisis caused land prices in Tokyo to drop. The properties that fell the furthest then reached the highest levels afterwards. That’s why we set forth our Summit 5 project of investment and development focused in the heart of Tokyo, where land prices had dropped the lowest. This strategy has been immensely successful, and today APA Hotel has 70 hotels in central Tokyo including those under design and construction.
(K) It sounds like everything went very well for APA Group. I founded TKP in 2005, and several rising developers became initial shareholders.

Building a nationwide hotel network propped by high earnings in Tokyo

(M) Looking back, I feel like APA Group has survived three major economic upheavals. The 1973 oil crisis happened right after our founding in 1971. Our main business was order-made housing, a process in which we undertook building at a specific price, completed the construction, and received payment after delivery. But the oil crisis caused rapid inflation, making construction material prices soar. Many projects would put us in the red if we didn’t complete them at the original prices. That’s why some contracts had an inflation clause that said the client could be billed for more money if construction materials and other prices went over a certain level. Companies in the industry unanimously raised their prices, but I believed we would lose trust if we didn’t abide by the agreed-upon price, so we had a policy of no price hikes. I thought gaining trust was the first thing a company should strive for – this would allow us to procure funds, which would cultivate even stronger trust. We stuck to this policy, and the work orders poured in.
(K) Like they say, “You must lose a fly to catch a trout.”
(M) The next upheaval was the burst of the asset price bubble. Stock and land prices rose together during this economic bubble, a time when I frequently traveled to the United States. An American friend and I were thinking about the possibility of investing in real estate in Los Angeles. This friend taught me about non-recourse loans. Using this method, each of us would put down 10% to implement the project (for a total of 20%), and the remaining 80% would be non-recourse debt secured by collateral. If the business failed, only the collateral could be seized. We could earn profit by investing just 20% into the project, for excellent yields. I also learned that land cost assessments across the world use discounted cash flow (DCF) analysis. When I took a look at Japanese land prices at that time, they were four to five times more expensive than the DCF analysis. The interest rates were higher than the earnings from the properties, meaning one could never make a profit unless they were sold. That was ridiculous, and I thought DCF analysis would eventually be used for land cost assessments in Japan as well. What happened next was Black Monday, the stock crash of October 1987. After that, APA Group sold off our real estate without buying any land. The bubble was still intact in 1988 and 1989, but land prices fell suddenly in 1990.
(K) So you were able to sell your real estate at the highest prices.
(M) Yes, and we made a significant profit. Back then the corporate tax rate was 65%. I thought it would be reduced in the future, so I wanted to postpone our profits. We bought a leveraged lease airplane using a non-recourse loan, as suggested by The Chase Manhattan Bank. We paid the down payment for the aircraft, but we were able to write off the entire cost. This amortization caused a major deficit for the first six years, but through the aggregation of profits and losses with capital gain, we earned our money back through extraordinary gain in the following six years.
(K) I see.
(M) To once again amortize this profit we got back, next we expanded the APA Hotel business we had already started. Hotel room furnishings (like beds and televisions) and opening costs are all lump-sum depreciable assets in the first fiscal year, so building many hotels allowed for extraordinary gains and skillful aggregation of profits and losses. APA Group also started raising funds through real estate securitization via a specified purpose company (SPC), something other major developers were not doing. APA Hotel Yokohama-Kannai, opened in 2005, was the first hotel in Japan employing this hotel development-type securitization scheme and built with non-recourse loans. After, we used that scheme for a series of projects on the 20-billion-yen scale. Without this scheme, I don’t think APA Group could have grown to its current size.
(K) It sounds like that was possible because you studied various types of advanced fund procurement, like when you learned about non-recourse loans in the U.S.
(M) Yes. However, a fund bubble occurred with rampant securitization afterwards. The bankruptcy of Lehman Brothers and other companies – the third upheaval we survived – stemmed from the subprime loan crisis. Land prices in central Tokyo fell drastically, and we very successfully moved into that area. There are various benefits to our strategy of dominance in the heart of Tokyo. We have several APA Hotels close to each other, so when needed the hotels can send staff members to help each other or transfer overbooked guests. And because we can take reservations without fear of overbooking, we achieve higher occupancy rates. Half of APA Hotel’s sales are from Tokyo, and one room in Tokyo makes as much as four rooms in rural areas.
(K) This high profit in Tokyo upholds your rural and franchised hotels.
(M) Exactly. APA Hotel has roughly 15 million APA Card members in total, and my hope is to provide hotels where they can earn points, no matter where they travel on business trips. We are building a nationwide hotel network with our own hotels in central Tokyo and major rural cities, franchise hotels in slightly farther locations, and partner hotels even farther afield. Still, our newly built hotels in central Tokyo are the most profitable.
(K) I hear you always visit potential hotel sites before buying them.
(M) Yes, I go to the property and make an immediate decision on projects up to 10 billion yen. The important considerations are distance from train and subway stations, how many rooms we can build, and the rough land and building prices per room. I think and decide on the spot by considering the occupancy rate and unit prices for guest rooms.

Building a system of wisdom on a “thought tree”

(K) I am fascinated by your management accomplishments. I feel like you possess amazing wisdom and information-collection abilities.
(M) One of my Words to Live By is, “Invention is proportional to distance traveled.” I have traveled to 82 countries including the U.S. I’ve enjoyed reading the newspaper since I was young, and I’ve continually absorbed different types of knowledge from the printed word. I have transformed this knowledge into wisdom by verifying it based on my own experience and observations. Wisdom can be used immediately, but knowledge has to be recalled to be used. Elite figures in Japan are skilled at rote memory, so they merely parrot what they read in the newspaper every day. In this digital era, knowledge is disconnected.
(K) That seems to make sense.
(M) In contrast, I think of myself as having a “thought tree” inside my body. I know where my knowledge and wisdom is located on the trunk and branches, and to which branches I should add the latest news as leaves. All of this knowledge, wisdom, and information is connected. That is why I write the same things in my essays today as I did 10 years ago. Pieces of my wisdom are published each month in Apple Town as my “APA Words to Live By.” The former ambassador from Bahrain was a fan of my words, and he showed them to the king when he returned home. The king said, “A person who writes these sayings every month must be a philosopher. I would like to invite him to Bahrain.” That’s how I came to visit Bahrain as a state guest.
(K) That’s wonderful.
(M) TKP’s business of “repurposing space” is also fantastic. APA Hotel has achieved high profitability through lodging, but we’re quite weak when it comes to banquets. You profit by renting and sharing these latent spaces. Companies have to be number one to succeed, something that also applies to APA. APA Hotel has Japan’s tallest hotel and some of its largest, as well as the highest profitability in the world.
(K) TKP is also striving to become number one, and we also want our partners to be number one, too. This is because, by partnering with top accommodation facilities, we can expert synergy such as by transforming simple conference rooms into popular training facilities.
(M) You can build win-win relationships.
(K) APA Group’s predicted net sales of roughly 120 billion yen and profit of 36 billion yen for this period are astounding. Your profit is more than our net sales.
(M) TKP still has room to grow. APA Group has finally achieved this in our 48th year.
(K) We were founded 13 years ago…
(M) That’s just one fourth of APA’s history. TKP has the potential to be a company that vastly exceeds APA! I think you’ve done a great job at finding business niches, such as using vacant hotel and company spaces as conference rooms. You also recently represented Japan in Monaco.
(K) Yes, I was the Japanese EY Entrepreneur of the Year. I went to the international forum in Monaco in June, but unfortunately I didn’t win the world title (laughs).
(M) I’ve seen TKP signs on all sorts of buildings.
(K) Our current logo was made by Interbrand, which also created Nestlé’s logo.
(M) APA’s logo was done by Landor. Recently, on September 1, we also opened a revamped APA Hotel website using the latest technologies, which was designed by J. Walter Thompson. Technological innovation proceeds at a breathtaking pace, and we will be left behind if we aren’t careful. I keep an eye on what technologies come out and think about how to use them at APA Hotel. We installed automated check-in machines at our first hotel, which was opened in 1984, but the world wasn’t ready for them. The Inns and Hotels Act was revised this June, so now we can use automated check-in devices quite effectively.
(K) I used the latest automated check-in device in Sendai.
(M) We plan to introduce more compact automated check-in devices for credit cards in light of the coming cashless society. We are also considering things like a system in which the guest places his or her card key in a box when checking out, and instructions are sent to cleaners automatically reading which rooms are vacant. APA Hotel is offering better convenience to users by always evolving and bringing the latest facilities into our newest hotels.

Young people should enjoy life with a hungry spirit and sense of adventure

(M) Management skills learned on paper and in actual practice are totally different. For instance, graduates of the University of Tokyo’s Faculty of Law who become government officials and then start companies tend to have bad business senses. Their management styles may be theoretically correct, but things often don’t go as planned. The Japanese school system only tests for the ability to memorize. This is a type of “digital” knowledge, as I mentioned before. Knowledge is always overwritten. Perhaps these people believe they are good learners and workers, but they lack wisdom. It’s important to build a structure of wisdom connected through “analog” means. For instance, debating is part of American education. Students are given a topic and made to discuss it while providing evidence for or against. The sides are chosen by drawing, so they must prepare to defend either side, which cannot be accomplished just through memory. Japanese education needs to incorporate more learning like this that doesn’t depend on memorization.
(K) People say the digital era is one of discontinuity, but I feel that’s a bit of an exaggeration.
(M) We must have knowledge of the past to forecast the future. We need to attach more importance to an “analog” way of thinking. Because I am capable of this, I have correctly predicted many things such as President Barack Obama visiting Hiroshima, Donald J. Trump winning the presidential election, and Japan becoming a major sightseeing destination. At the end of the interview, I always ask for a “word for the youth.”
(K) I get the impression that many Japanese youths are more timid than other Asians. Few have a hungry spirit. Chinese people are more motivated. Growth cannot be accomplished in this way, which is probably why Japan hasn’t become hugely wealthy. Still, saying this won’t motivate people without a hungry spirit, so I’m not sure what to do.
(M) I feel like young people don’t have big enough dreams. That’s not interesting at all, so I tell them to dream big. In my elementary school yearbook, I wrote that my aspiration was to become “president of the world federation” (laughs).
(K) That’s certainly big! I hope young people will be adventurous and enjoy what life throws at them.
(M) Yes, we’re only given one life. Thank you for joining me.
(K) I learned a lot. Thank you.

Date of dialogue: September 11, 2018

BIOGRAPHY
Takateru Kawano
Born in Oita Prefecture in 1972. After graduating from the Faculty of Business and Commerce of Keio University in 1996, he joined the stock exchange department of Itochu Corporation. He took part in the foundation of Japan Online Securities Co., Ltd. (currently Kabu.com Securities Co., Ltd.). He also served in Ebank Corporation (present Rakuten Bank Ltd.) as director general manager of the Sales Department. He is currently president and chief executive officer of TKP Corporation, which he launched in August 2005. TKP was listed on the Tokyo Stock Exchange Mothers market in March 2017. In June 2018, Kawano represented Japan at the EY Entrepreneur of the Year Award 2018 award ceremony.